Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.

Wednesday, April 16, 2014

If global stock markets cheer weakness in Europe , China and Japan as signs further monetary manipulations by Central Banks are forthcoming , does anyone wonder how broken economies manage to fund not just themselves put truly insolvent nations such as Greece or other members of the PIIGS ?

We summarized yesterday's both better and worse than expected Chinese GDP data as follows: "a substantial deterioration of the economy, one which was to be expected yet one which can be spun as either bullish thanks to the GDP "beat", and negatively if the purpose is to make a case for more PBOC stimulus." Sure enough here are the headlines that "explain" the latest overnight futures surge which has once again brought the S&P into the green on the year - a 40 point Spoo move in hourssince yesterday's bottom when the Nikkei "leaked" Japan's economy is on the ropes :

Stocks Rise on China Stimulus Speculation

Here one should of course add thecomment that launched yesterday's rebound, namely the Japanese warning that its economy is about to contract, adding to calls for more BOJ stimulus, and finally this other Bloomberg headline:

The Strengthening Case for ECB Easing

And there you have it - goodbye"fundamental" case; welcome back "central banks will once again bail everyone out" case. Hopefully today's news are absolutely abysmal to add "US economic contraction fear renew calls for untapering" to the list of headlines that should send the S&P to all time highs by the end of today.

After four long years of “service”, the Troika’s frontline role in sustaining and exacerbating crisis conditions in Southern Europe is finally beginning to attract some of the attention it deserves. In my home city of Barcelona, a coalition of left-wing groups recently held an event to raise awareness about the Troika’s “neo-liberalisation” of Southern Europe. Even Europe’s shoe-shine institution, the European Parliament, has promised to launch an enquiry into the Troika’s operations after the European elections in May.

Since its inception at the beginning of Europe’s sovereign debt crisis, the unholy alliance between the IMF, the European Central Bank and the European Commission has visited untold damage on the economies and societies of a long and fast-growing list of countries.

A Three-Pronged Attack

In many ways, the conditions set by the Troika in the EU bail-out economies resemble those that a conquering army might impose on a country it occupies. The government of Greece, for example, has been reduced to mere vassal status as the country’s welfare state and public services are stripped to the bone by corporate vultures.

As the Chilean writer and political activist Luís Sepulveda said in an interview for the Greek documentary Catastroika, “What is happening in Greece is terrible. Democracy was born there and the international financial system now decides it should die there as well.”

As part of that ongoing process, the costs of privatisation have been borne almost exclusively by cash-starved Greek taxpayers, while the profits – initially estimated to be worth some 50 billion euros – go to the international creditors. Entire industries, from rail to water, ports and airports, roads and healthcare – industries that are meant to serve a vital public purpose and have received decades and decades worth of public investment – are now being sold off at car boot-sale prices to private international corporations and investment funds.

And it’s not just happening in Greece. Even in countries yet to have received a bailout, pressure is building to privatise state assets. In Italy, a referendum on water privatisation was held in June 2011. Fifty-seven percent of the population turned out, with 97 percent of voters rejecting the proposal outright. It was as decisive a statement of the popular will you’re likely to find; yet it was also, as is so often the case with national referendums in Europe these days, the wrong answer.

Undeterred by the strength of popular opposition, the Troika continued applying pressure on the Italian government to privatise state water companies, but Italy’s geriatric playboy-premier Silvio Berlusconi refused to buckle. Not that it mattered: A year later, after becoming too much of a liability to the European project, Berlusconi was toppled in a lightning fast Brussels-orchestrated coup d’état. His replacement, Mario Monti, a life-long banker with close ties to the European Commission, Goldman Sachs and the elitist think tank the Trilateral Commission, was, as you’d imagine, somewhat more amenable to the Troika’s desires.

It was a perfect example of Marxist philosopher Slavoj Žižek’s maxim that “when things get serious in today’s world, the ‘experts’ take over’”. In short order Monti received a letter from former and current ECB chairmen Jean Claude Trichet and Mario Draghi insisting on the privatisation of Italy’s water distribution rights. The fact that such a proposal had already been point-blank rejected by the Italian people and was effectively illegal under the Italian constitution mattered not a jot. Since then attempts have been made – some successful – to privatise water districts in Italy, including in the country’s capital, Rome.

In Spain, meanwhile, the Rajoy government has been more than happy to meet the Troika’s demands to privatise social housing (selling off huge batches to international investment funds and Wall Street banks) and public hospitals (albeit with somewhat less success, thanks in large part to the strength of public opposition). The government has also removed public subsidies of basic utilities, including gas and electricity, resulting in sharp increases in the basic cost of living.

The same story is playing out across Europe’s bailed-out nations. The losers are by and large the poor and middle classes, while the beneficiaries are the same as always: the world’s largest multinational corporations and (yeah, you guessed it) banks.

Protecting the Banks, At All Cost

That the Troika should put the banks first (and for that matter, second, third and fourth…) should hardly come as a surprise. After all, two of the Troika partners – the ECB and IMF – are essentially little more than puffed-up bankster henchmen, while the other, the Commission, is in hock to Brussels-based lobbying groups.

Through its actions of the last 40 years, the IMF has amply shown on which side its bread is buttered. A perfect case in point was the 1994 bailout it lead of Mexico in the wake of the Tequila Crisis. As Lawrence Kudlow, then economics editor of the conservative National Review magazine, asserted in sworn testimony to congress, the ultimate beneficiaries of the bailout were neither the Mexican peso nor the Mexican economy:

It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesorobonos and about $2.5 billion of peso-denominated Treasury bills (cetes).

In effect, money lent by the IMF, BIS and US Treasury Department was speedily channelled via the recipient country’s government and struggling banks to the coffers of some of the world’s largest private financial institutions. The money barely touched Mexican soil, yet the debt remains – indeed, thanks to the wonders of compound interest, continues to accumulate – to this day.

This is essentially the financial crisis management model now being applied across almost all Western economies, with the notable exception of Iceland. In Greece, a staggering 300 billion euros worth of unpayable debt has been ploughed into its moribund economy. And just as happened in Mexico, a risible fraction of that money has actually stayed on the ground.

According to a paper published by the main Greek opposition party, SYRIZA, titled “The Greek Rescue Plan: A Humanitarian Crisis,” a staggering 98.4 percent of the bailout funds have been diverted back to Greece’s lenders, rescuing primarily French and German banks. That’s right: a pitiful 1.6 percent of the European Stability Mechanism’s money is actually making it into the real Greek economy. The money moves to richer shores but the debt continues to grow.

What’s more, while workers and pensioners are overtaxed and suffer the consequences of severe spending cuts, the Troika and the government have done pathetically little to tackle the real problem of tax evasion. According to SYRIZA, government authorities found that 6,575 offshore companies owed hundreds of millions of euros in taxes. Guess how many off those companies have actually been called by the authorities to settle their accounts? Thirty-four – that is, 0.5 percent of them!

In sum, the main beneficiaries of Greece’s successive bailouts have been French and German banks, not to mention Greece’s own financial, business and political elite. As for Portugal’s bailout, the main beneficiaries have been Spanish banks, while in the case of Ireland’s “rescue”, UK and German banks have taken home the lion share of the spoils.

All in all, trillions of euros of new debt — debt that multiple generations of Europeans are now on the tab for — have been conjured out of thin air and pumped through national finance ministries. And for one purpose: to save the continent’s biggest banks from the consequences of their own reckless malinvestments. While the people of Europe are told that they cannot afford to pay for even the most basic of public services, including the distribution of water, staggering sums of money are wasted on walking-dead financial institutions.

A New Age of Technocracy

If events proceed as long planned in the backrooms of Brussels, the Troika’s role will be a temporary one, consisting primarily of holding the fort whilst the European Union completes its final stage of metamorphosis, from a trading and currency bloc to a fully fledged banking, fiscal and political union. By then, a new age of technocracy will be upon us as a newfangled system of top-down, heavily centralised political and economic governance, by, of and for the economic elite, is enshrined into law.

As Barry Ritholtz recently noted on his blog, one of the most disruptive paradigms of our age has been the ruthless supplantation of the individual in the political process by corporate money, legislative influence, campaign contributions, even free speech rights:

The new dynamic has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual. These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.

While Ritholtz’s argument was made with specific reference to U.S. politics, I believe it has just as much, if not more, bearing on the current European context. After all, European centre-left parties are arguably the strongest cheerleaders of the European project, despite the tremendous harm it is doing to their traditional constituencies. What’s more, the pace of neoliberalisation of the European economy is, if anything, even more ferocious than it is in the U.S.

As the attention of the Troika begins to shift northwards, to France and beyond, as it inevitably will, traditionally divided Europeans from across the political spectrum face a conundrum of existential proportions: do we unite and fight to save what we have, or do we roll over for the corporate steamroller?

With a report just out by Save the Children that 28 percent of European children (in particular those living in countries subject to the Troika’s bail-out regimes) are now at risk of poverty and social inclusion, time is of the utmost essence. If the people of Europe want to safeguard European democracy from the Troika’s whirlwind of “uncreative” destruction, they will have to act soon.